On the Causes of Soft Budget Constraints: Firm-Level Evidence from Bulgaria and Romania

Several theoretical explanations for the presence of soft budget constraints have recently been put forward in the literature. The purpose of this paper is to empirically test these theories on the causes of soft budget constraints. We therefore use a panel data set, consisting of company account data for Bulgarian and Romanian manufacturing firms, covering the period 1996-1990. Our results suggest that the probability of finding soft budget constraints importantly depends on the degree of competition within the sector and on the ownership of the firm. Ownership structure in Bulgaria however, has no additional explanatory power once firms are loss-making. We further find that socio-political concerns about employment increase the probability of SBC's, but only when firms are loss-making. Thus, our empirical results largely confirm the hypotheses that competition, privatisation and firm size matter in explaining soft budget constraints, as suggested in the theoretical models on the causes of soft budget constraints.